Logistics Manager of a Vitamin Manufacturing Company

Problem:

The logistics manager of a vitamin manufacturing company is paying a premium price for the transportation of vitamin ingredients and would like to decrease costs by increasing order quantities and creating FTL shipments instead of LTL shipments.

The logistics manager has discovered that by increasing order quantities of high quality product “X” to create a full truck load he would be decreasing per unit transportation costs. Appendix 1 shows that an increase in order quantity to 26 pallets from 10 pallets per order (160 % increase), it will indeed decrease his yearly transportation costs by 50%.

However, an increase in order quantity can also increase inventory holding costs. Moreover, the logistics manager must look at the potential problems associated with holding extra inventory; does the company have storage space? Is product X perishable? Will financing a higher order quantity be possible? What about the opportunity cost of holding more inventories?

Increasing order quantities is a decision that cannot be made in isolation.

Transportation is a very important part of the logistics system; however, it is only one part. The logistics manager is feeling pressure from above to reduce costs; however, his only domain is transportation management. This indicates that – like many companies - the vitamin production company is organized in separate departmental silos. The lack of interface between departments can create overall cost increases because every manager is working in isolation.

Effective Logistics decisions require interfacing with all departments including production, marketing, finance, warehouse management, and purchasing to keep costs at a minimum.

Cause:

The vitamin industry is a highly competitive, price sensitive market. Customer service is highly important because of the substitutability of the product – stock out costs are high because consumers will buy another brand if vitamin x brand is not available. With this in mind production would be based on supporting a high level of customer service.

If there is pressure to reduce costs, it is highly likely that the vitamin that product X is used for is in the mature or declining stage of the product life cycle. Thus cost reduction is necessary in order for the firm to remain competitive in the market and retain a market share.

Reducing transportation costs can be a fairly fast and easy fix in the short run to bring the cost of goods sold down, however without fully analyzing the effect that it would have on inventory carrying costs – the reduction of transportation cost will not be effective.